Consumer advocates shifting focus to foreclosure's aftermath

The General Assembly will consider a handful of bills related to the mortgage crisis, but unlike in previous years, many focus on what happens to borrowers after foreclosure.

The bills — most of which would limit the risks of debt that can linger after homeowners have lost their houses — are important, proponents say, but they are smaller in scope than in years past, a reflection of a system that has experienced drastic overhaul since 2008.

"There's been significant improvement. I won't say it's perfect, and there are a lot of little things that could probably be tweaked to make the process work better," said Cheryl Hystad, executive director of Civil Justice, a nonprofit that offers people legal help on foreclosures. "Most likely, anything that gets introduced going forward will be tweaking. I don't see anybody advocating or pushing for a huge overhaul."

Since 2008, new laws and national settlements of mortgage lawsuits have established stronger consumer protections. As the system became more settled, lenders started processing a backlog of delinquent loans, one of the reasons why Maryland now has one of the highest foreclosure rates in the country.

While the surge has prompted some advocates to seek a six-month moratorium on foreclosures, that bill faces adamant opposition from the Maryland Bankers Association, the chief lobbying group for lenders.

The organization is seeking a compromise on other bills that might limit lenders' ability to seek debts from homeowners after foreclosure, said Kathleen Murphy, its president.

Many delinquent loans have been resolved through measures such as short sales or foreclosure auctions, in which a home sells for less than the value of the mortgage. Under current law, lenders have 12 years to file in court to recover the difference from homeowner.

Many lenders agree to forgive the loss — often counting the measure toward money owed as part of major mortgage settlements. But housing advocates worry the leftover debt, known as a deficiency, will become a bigger problem, pointing to an increase in the number of cases.

The number of deficiency judgments against former homeowners jumped to 120 in 2012 from 19 in 2006, according to the Maryland Consumer Rights Coalition. A total for last year was unavailable.

"Right now we're seeing the tip of the iceberg," said Marceline White, executive director of the coalition, which is pushing to shorten the statute of limitations for collecting deficiencies. "As a public policy goal, we actually want to avert the problem now."

The current system allows lenders — or the agencies that purchased the debt — to wait until a borrower's finances have recovered, then hit the person with a potentially crippling burden that has also accrued interest, housing and consumer advocates said. The average amount of deficiency ranges from $2,000 in Caroline County to $257,000 in Montgomery County, according to the coalition.

Bills in the House and Senate would give lenders or debt-buyers 180 days rather than 12 years to file to pursue the deficiency as part of foreclosure proceedings.

"The law should be structured to give people the opportunity to get back on their feet. It should not be structured in such a way that if and when they save money that the money can then be seized by a debt-buyer," said Sen. Jamie Raskin, lead Senate sponsor of a bill to shorten the statute of limitations.

"If they want to try to squeeze blood from a stone, they can do it within 180 days," said Raskin, a Montgomery County Democrat.

Critics of the bills say lenders pursue cases in a limited "strategic" manner and the numbers do not show evidence of a problem. Murphy, of the bankers association, argued that a shorter statute of limitations would prompt banks to file to collect the deficiency automatically, ultimately forcing more people into bankruptcy.

"You're going to see more lenders file just to preserve their rights rather than look at it over a period of time and determine strategically, is there an opportunity to pursue this," she said.

The bankers association has opposed the bill but is in negotiations about a compromise timeline, Murphy said.

The association is "strongly opposed" to another bill put forward by Montgomery County Del. Heather Mizeur, who is running for the Democratic nomination for governor, that would eliminate the ability to seek deficiency judgments.

"If you think about it from the standpoint of the homeowner in the state of Maryland who signed a contract with the lender, the cost of mortgage credit would be higher," she said.

Many housing advocates have coalesced behind Raskin's measure as a way to bring homeowners more certainty.

Hystad, the executive director of Civil Justice, said Raskin's bill offers a more "realistic" solution to the problem. The organization submitted testimony in support of his bill, but not Mizeur's.

"We think it would be wonderful if that bill passed," Hystad said of Mizeur's proposal. But "we thought that shortening the statute of limitations probably has a realistic chance of passage, whereas just eliminating the deficiency judgment would be a very difficult thing to do."

At least 10 states bar the collection of deficiency judgments and 12 others require lenders to file to collect the deficiency within three months, according to the Maryland Consumer Rights Coalition. Under Maryland law, most debt suits must be filed within three years.

"I'm not questioning the legitimacy of the debt at all, it's a question of when that debt should be acted on," said Baltimore County Del. Steve Lafferty, a Democrat and the House sponsor of the statute of limitations bill.

Another bill would extend a tax exemption for some kinds of mortgage debt forgiven through means such as refinancing.

Federal and state tax exemptions expired at the end of last year, exposing homeowners to the possibility of having to pay income tax on the debt.

"If the bill doesn't pass and the [federal government doesn't] extend it, they'll be hit with an exorbitant tax bill," said Montgomery County Del. Craig Zucker, who introduced a bill that would exempt the debt from state income tax for two more years. "This will be a burden most people can't take."

At the state level, a legislative analysis of the exemption estimates an annual loss of about $8 million in state tax revenue and $5 million in local revenue. An extension of the federal tax exemption also is pending in Congress.

Owen Jarvis, an attorney with St. Ambrose Housing Aid Center, said he hopes this session's bills reflect that the foreclosure crisis is starting to come to an end.

"I don't know if we're on the tail end of the foreclosure crisis — I'd love to believe we are — and as that starts to wind down there's a shifting of directions," he said. "Having been in this for years now, advocates are maybe looking at what comes after and trying to position themselves accordingly."